Up, up and away?

May 3, 2012

By Russ Napolitano

There has been heightened talk over the past week about a pending merger between American Airlines (AMR Corp) and US Airways (US Airways Group Inc). Currently, American and US Airways rank as the 3rd and 5th largest airlines in the world, respectively, and a merger between the two would create the largest global airline. On the surface, one would assume that this is surely a win win for both airlines.

The buzz of a potential merger between these two airlines is not anything new as these talks have been circulating on and off for years. However, talks have recently picked up since American filed for its latest Chapter 11 bankruptcy protection in 2011. American has made it clear that they are not interested in a merger with US Airways, or any other airline for that matter, and that they are exploring all possible alternatives that will allow it to emerge a healthier organization.

It seems to me as though a merger between the two airlines would make US Airways appear to be American’s “knight in shining armor.” A merger would rescue American from the continued uphill battle it faces trying to emerge from bankruptcy a stronger, more competitive airline. On the surface, US Airways appears to be the healthier of the two organizations in terms of revenue. According to the Associated Press, US Airways Group, Inc. reported a first-quarter 2012 income of $48 million, or 28 cents per share with revenue rising 10 percent. Additionally, US Airways has gained the support of three of American’s unions (an amazing feat unto itself), offering American pilots an immediate 5.5 percent raise and a 3 percent increase for the subsequent five years, according to American’s Allied Pilot Association. Keep in mind that these terms are more generous than anything American has offered its pilots to date. The fact that US Airways is sporting a healthier revenue stream, combined with its ability to win over the unions makes an immediate impression that US Airways should indeed be a formidable player in the potential merger.

Now let’s take a closer look at this potential merger from a branding perspective. Perhaps one of the most intriguing issues for me is taking into consideration the fact that this merger will result in American keeping its name and US Airways moving its headquarters to Dallas/Fort Worth — the home of American. So, even though the #5 airline is throwing a life-line to the #3, the “hero” or “rescuer” will end up losing both its identity and its home. One might consider both of these scenarios not much of a reward or recognition of the valiant efforts of the smaller player trying to resuscitate its larger competitor. In addition to being the larger of the two, American also happens to be the oldest. The American Airlines name came to be in 1930 and USAir’s in 1979. So, does being the younger and smaller player in a merger automatically mean that you have to lose a sense of your own identity? By now we are all certainly aware that being older does not necessarily mean being wiser, which is quite evident as American is the airline finding itself vulnerable.

I understand that American is the larger of the two corporations in terms of the size of its fleet and its number of routes and employees. But just because you are bigger, it doesn’t necessarily mean that the smaller entity isn’t bringing along some good baggage (pun totally intended). So, lets take a closer look at the relationship between American and US Airways beyond their respective positions in the market. Every year at this time, CoreBrand issues its BrandPower Rankings for the top 100 corporate brands. Our BrandPower Ranking is based on familiarity (how many people are aware of your corporate brand) and favorability (the quality of your corporate reputation, perception of its management and its investment potential). Leveraging these two attributes can help optimize a corporate brand’s performance.

Our team closely analyzed the data and the details of the findings while compiling the rankings for the recent release of our 2011 CoreBrand BrandPower Top 100. Our BrandPower Rankings place American at #159 and US Airways at #295 (a total of 136 positions behind American). It is also interesting to note that American has improved over the past three years from #176 in 2009, #161 in 2010, and #159 in 2011. On the other hand, US Airways has experienced steady declines over the same period — #270 in 2009, #279 in 2010, and #295 in 2011. Please take note that neither airline makes it in the Top 100.

The BrandPower Rankings certainly support both airlines’ current position and what most people might think about them in terms of their overall reputation, management and investment potential. With regard to market position, we have been told that a merger with US Airways will help to propel American to the #1 spot. I have no doubt that US Airways will increase both American’s and its own BrandPower rankings from all the hype surrounding the potential merger.

I then took a deeper dive to better understand exactly what US Airways is bringing to the merger table in terms of its Brand Equity Value (BEV). The BEV helps to determine the percentage of market capitalization that is directly derived from the corporate brand. In other words, the BEV provides us with an understanding of how much the corporate brand is contributing to the overall equity or stock value. In 2011, USAirways' BEV was 8.9%, which is well below the industry average of 11.5%.

This does make it pretty clear that both airlines need one another in order to survive. However, in planning their survival strategies, they should take the best equitable assets of the two entities. In addition to the financial equity, which can be measured in revenue and stock price, each airline also has a brand equity, which is represented by the visual and cultural communications that are immediately recognizable and deeply rooted among its stakeholders. This type of brand equity also contributes to the corporation’s overall value. For example, assuming that the merged entities are retaining the American name as reported, the resulting entity should also harness some recognizable element from US Airways such as its flag icon, typeface, color scheme, or even its internal culture.

The best solution to helping to determine what is truly fair and equitable would be to conduct some in-depth quantitative research using a methodology that will help to identify which of these individual assets would contribute the most to optimizing the performance of the merged brand. Using some combination of assets between both brands seems like the fair thing to do. This strategy would give US Airways a “we thank you” consolation prize allowing it to retain some of its connection to its heritage and with its internal and external stakeholders. This is a similar strategy that was deployed for the merger between Continental and United where the merged entity utilized the United name with the recognizable Continental globe icon.

As a loyal US Airways flyer for over 20 years as a result of my living in Philadelphia, one of its hubs, I hope that US Airways will be able to retain some of its identity. If not for anything but to serve as a daily reminder to its CEO, Doug Parker, and his team that American’s very existence is the result of this smaller entity coming to the rescue of the larger. Regardless of BrandPower Rankings and Brand Equity Value, it would just be too ironic if US Airways' helping hand would result in its demise with its own identity (name and home) going up, up and away.

As of this writing, American is still fighting to keep its independence with a desire to emerge with a business plan that provides for substantial growth and opportunity for its employees, especially for its pilots. Only time will tell the true fate of both of these airlines.